For the first time in some years, roughly half of the investment ideas provided by speakers were shorts – and for the first time ever that I can recall, a handful were explicitly ESG-inspired. Some ESG policies remove stocks with low ESG ratings from both the long and short investment universes, while others view shorting such stocks as not only a source of alpha, but also a way to incentivise changing corporate behaviour.
Scott Goodwin, managing partner and co-founder of Diameter Capital Partners, trades the full gamut of credit from liquid to distressed, based on sector themes and macro views. He expects that plastic packaging could be the next demon vilified by ESG investors, since recycling is low, it takes centuries to biodegrade and kills dolphins and whales. On top of this China has stopped accepting US plastic. This could raise the cost of capital for plastic firms just as it has for tobacco firms. He is short of Plastipak unsecured bonds, which he perceives to be closer to equity risk than credit risk. The firm’s margins of 4% are well below peers at 10-12% and Plastipak could be the next shoe to drop as giants such as Nestlé move away from plastic packaging.
Spencer Glendon, founder of Probable Futures, argued that human civilisation is based on stable climates and that financial models do not reflect unstable climates which are causing the Poles to melt. Higher temperatures, storms and droughts could threaten economic growth and physical settlements in areas from Florida to Mexico and India. Glendon is short of Floridan municipal bonds, mortgage-backed securities and banks with exposure to the sunshine state.
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